Only last month, an auction for non-fungible tokens or NFT’s, included a computer-generated illustration by a digital artist, which sold for a staggering $69.3m. That’s right! What is essentially a JPEG that can easily be copied, sold for as much as a 3-bedroom, 3-bathroom apartment overlooking Central Park in New York. In the previous month, an NBA video clip of a Lebron James dunk sold for $208,000. Bitcoin is up 500% during its latest bull run and the price of stocks that are unlikely to turn a profit are soaring.
What is causing this speculative frenzy? An environment of rock bottom interest rates and an abundance of liquidity and savings certainly helps. But for bubbles to form, it requires investors to buy and sell off each another on the expectations that prices will rise inexorably and produce outsized gains.
But do investors need headline-catching returns like this to achieve their goals? Good investing is not about earning the highest returns as they tend to be fleeting that destroy your confidence when they eventually end. It’s about earning respectable returns that you can stick with over the long-term, so that compounding can work it’s magic. It helps to know your destination, understand your time horizon are not be distracted by the actions and behaviours of others who are playing different games. Imagine setting sail without a plan, a compass or a map? It might be fun initially as you build up speed and let the wind take you. But this leaves you at the mercy of the weather conditions and you are just as likely to end up on a deserted island or washed up on the rocks.
I’m often reminded of a quote by one of the greatest investors of our time, Warren Buffett, who said “never risk what you have and need for what you don’t have and don’t need.” Most investors should not need 500% returns, but may be risking the 5% they need to meet their financial goals, by succumbing to the latest craze.